State revenue outlook is a little brighter

State revenues were projected to increase without the help of a tax hike for the first time in 2 ½ years in a new report released late Thursday by Executive and Legislative branch analysts.

But don’t break out the champagne just yet.

The nearly $406 million in annual extra revenues Connecticut can expect by 2011-12 represents just 10 percent of the $3.9 billion budget deficit projected for 14 months down the road. That still leaves a gap equal to almost 19 percent of the current state budget, and 53 percent of the entire $6.56 billion the state income tax will rake in this year.

And nearly half of the revenue growth in the new report from the legislature’s Office of Fiscal Analysis and from Gov. M. Jodi Rell’s budget agency, the Office of Policy and Management, comes from projected hikes in federal aid.

Further complicating matters, some of that growth in federal revenues would mandate increased state spending on social service programs, which could eat up some of the $406 million bonus.

“I guess it really comes down to whether you think this revenue shift is the beginning of an economic turnaround,” Rep. Cameron C. Staples, D-New Haven, said, adding legislators want to consult further with fiscal analysts for both branches about their assumptions.

Sen. Eileen M. Daily, D-Westbrook, said she asked legislative analysts to further research other states’ expectations for federal revenue for the near future.

The joint report estimates General Fund revenues for this fiscal year will finish $84 million above the level built into this year’s $18.64 billion budget.

For the upcoming fiscal year that starts on July 1, analysts now say revenues will be $181 million worse than those included in the preliminary budget, but $271 million better than had been anticipated for 2010-11 three months ago.

But most of revenue bonus for this fiscal year and next stems from federal grants that far exceeded state officials’ original expectations. Even in the latest report, state income tax revenues are expected to finish $70.2 million below budgeted levels in 2009-10, and just $27.8 million ahead in 2010-11.

Still, by 2011-12, fiscal analysts for both branches say the annual take from the income tax will have climbed to $7.18 billion – 9.5 percent above this year’s level and 7.5 percent higher than what’s now expected for the year that begins in July.

University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis, recently said he believes state analysts have been somewhat optimistic in their projections for the state’s economic recovery – and for the state budget deficit.

“I think that’s the optimistic scenario,” Carstensen said, of the $3.88 billion deficit legislative analysts had been projecting before the latest revenue growth. The UConn economist said he’s more skeptical about potential growth in bonuses for Wall Street executives and others in the financial services sector – a key source of income tax revenue for this state. “I don’t know anybody who thinks Connecticut is going to have very robust growth in the near future,” he said.

OFA, a nonpartisan agency, has a policy of not commenting to the news media on its reports. The governor’s budget director, OPM Secretary Robert L. Genuario, could not be reached for comment late Thursday.

Still, state officials have been tracking some positive economic signs over the past month.

• Connecticut gained about 3,000 jobs last month, according to the state Labor Department, though the unemployment rate remains high at 9.2 percent.
• Projected state income tax receipts grew by 0.4 percent in March, according to state Comptroller Nancy Wyman. Though that’s the first month they have not declined this fiscal year.
• The Dow Jones Industrial Average broke the 11,000-point barrier earlier this month for the first time since September 2008. That represented a more than 60 percent recovery from the low point reached during the most recent recession, a 6,626-point finish on March 6, 2009.

But there also are some signs of a lingering sluggish economy.

The income tax isn’t the only revenue source that hasn’t matched original budget estimates this fiscal year.

The other major taxes, sales and corporation, remain $141 million off the mark, and levies on estates, cigarettes, oil companies, and alcoholic beverages also are under-performing.

Technically, federal aid drops drastically in 2011-12 as more than $1.5 billion in emergency stimulus grants expire. Those grants are supporting ongoing programs in both this state budget and the next one, and this heavy reliance on temporary assistance is one of the major factors behind the huge deficit projected for the state budget 14 months down the road.

But in this latest report, state analysts increased their expectations for non-stimulus, federal grants by just over $200 million for 2011-12. But that is due largely to a recent decision by Rell and the General Assembly to move more state social service programs under the umbrella of the federal Medicaid program.

Republican legislators, who are in the minority in both the state House and Senate, have cautioned against this move. They note that in order for a program to qualify for federal assistance through Medicaid, it must operate under “entitlement” rules, meaning all applicants who meet program guidelines are entitled to receive benefits. This prevents states from capping spending on the program, and in the long run could drive up social service program costs – and offset some of the projected revenue growth for 2011-12.

The Office of Fiscal Analysis is expected next week to release a complete budget forecast, including both spending and revenue projections along with revised deficit and surplus assessments for this fiscal year and the next two.